Investing in dividend-paying stocks through a self-managed super fund (SMSF) is a common strategy by trustees — especially when these dividends carry franking credits that hold potential tax benefits. For SMSFs in the drawdown phase, dividend-paying stocks can also offer an additional source of income in retirement. However, SMSF trustees must remember that with dividends come tax implications, and it’s important not only to track dividends for tax purposes, but also as a way of monitoring cash flow and getting the full picture of your SMSF portfolio’s performance. This article will explain three reasons why SMSF trustees should be tracking dividends and how using a portfolio tracker can help save time and money when running an SMSF.
Brokers Don’t Track Dividends
Most brokers don’t track dividends, forcing SMSF trustees to manually track these payments, which can be a tedious and time-consuming process. With dividend payouts for example, listed companies, exchange-traded funds (ETFs) and managed funds outsource the task of tracking who owns shares and who is paid dividends to share registries. Therefore, if you want to record your dividend payouts, you will either have to painstakingly sort through stacks of paper statements, access multiple online registries, or a combination of both.
Unfortunately, even if you elect to have your dividends deposited into your brokerage account, your broker will not be able to calculate your dividend yield because they have no visibility into the source of the cash. Without a portfolio tracking software, you will need to calculate your dividend yield manually, which can be complex and subject to inaccuracy.
However, if you use a portfolio tracking tool such as Sharesight, dividends and distributions are automatically tracked — meaning you can spend less time on tedious portfolio admin and more time focused on making informed investment decisions.
Sharesight’s online portfolio tracker automatically tracks dividends and distributions, clearly displaying their impact on your returns.
Franking Credits Affect Your Dividend Income
Franking credits can provide attractive tax benefits for SMSF trustees. Received during an SMSF’s accumulation phase, these credits can offset the tax payable on dividends, and can be used in general to reduce or eliminate taxes paid on SMSF income such as capital gains and rental income. For this reason, stocks with fully franked dividends tend to be a popular choice for SMSF portfolios. However, it’s important to understand the impact that franking credits have on your dividend income and how this can affect your tax return.
Done manually, calculating the tax implications of your franking credits can be quite time-consuming. In this case, checking the bank account where your dividends are deposited won’t be of any help because it will only display the net payment amount. To get the information you need, you will have to access the relevant share registry — most likely several share registries if you want to create a portfolio-wide tax picture.
Using a portfolio tracker like Sharesight can help you avoid this long-winded process by automatically recording franking credits, clearly distinguishing between the net dividend and any tax credits. This allows you to effortlessly calculate the taxable income on your SMSF investments, helping you save time when preparing your fund’s annual return.
Continue reading this article below the formReinvested Dividends Change Your Cost Base
Opting into a dividend reinvestment plan (also known as a DRP or DRIP) can be a good way to grow wealth in your SMSF portfolio without generating costly brokerage fees. Unfortunately, DRPs can make it difficult to calculate your portfolio’s returns due to the way they impact the cost base of your investment holdings.
DRPs are managed by share registries, which once again means that your broker has no visibility into these reinvested dividends and it’s up to you to keep track of them. They can be a pain to track manually because when dividends are reinvested, the shares are purchased at the current market price (sometimes at a discounted rate). This creates an added layer of complexity when tracking your returns because the cost base and the amount invested is always fluctuating, affecting your capital gains tax (CGT) should you ever wish to sell your shares.
Sharesight’s portfolio tracker allows you to automatically track reinvested dividends, including residual dividends. This gives you the freedom to opt into DRPs without having to worry about the admin involved in tracking ever-fluctuating cost bases for the investments in your portfolio.
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Key Takeaways
If you’re like most SMSF trustees, you’re probably taking advantage of dividend-paying stocks as a way to reduce your tax and provide a stream of income for retirement. With the long list of reporting requirements for SMSFs, the last thing you want to worry about is manually tracking dividends or every distribution that comes in — not to mention DRPs, cost bases and CGT calculations.
If you’re looking for a solution to automatically track your SMSF portfolio’s performance, dividends and tax, you may want to consider using an online portfolio tracker such as Sharesight. Sign up for a free Sharesight account to start tracking your SMSF investments today.
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